With the pandemic-related travel restrictions being lifted, the aviation industry has started gaining altitude. But the benefits of the rebound in demand to record highs are offset by rising fuel costs. American Airlines Group (NASDAQ: AAL), one of the badly affected flight operators, saw a sharp fall in valuation this year.
Currently, the main challenge facing the aviation firm, which has returned to positive territory after ending a losing streak, is high costs amid elevated inflation and lower asset utilization. The stock has lost more than 30% in the past six months, continuing the downtrend that started a few years ago.
Though the stock is super cheap, it doesn’t look like an attractive investment. Rather, it is likely to get cheaper in the future, because it would take a long time for the market to stabilize, causing investors to suffer losses. Also, American Airlines’ huge debt gives it less leeway to reorganize, compared to its peers. Unless those concerns are not addressed, AAL would remain a risky investment.
The company might face turbulence in the future, considering the strain on liquidity due to high costs related to retaining and recruiting key employees like pilots. The region’s airline industry has been facing a severe shortage of pilots, requiring companies to raise salaries significantly to deal with the attrition issue. Also, the company is not out of the woods yet as far as returning to consistent profitability is concerned.
In Recovery Mode
In the third quarter, revenues grew by a whopping 50% and totaled $13.5 billion, as demand conditions continued to improve. As a result, the bottom line came out of the negative territory and the company reported the second consecutive profit after three losses in a row. Interestingly, the overall outcome was much better than widely expected. Both passenger traffic and capacity picked up, marking an improvement from the recent slowdown. Meanwhile, operating expenses increased by about 50%.
“The changing nature of demand provides an opportunity to rework our commercial offerings to better meet the needs of all customers and create a more resilient and profitable business. We continue to develop the most comprehensive airline network in the world. As we’ve shared on previous calls, over the past few years, we have made the decision to sit quietly and simplify our fleet and network focusing on our flying and where we can create outsized customer value and working with our partners to create choices and value in areas where it’s cost-prohibitive to do so ourselves,” said CEO Robert Isom at the third-quarter earnings call.
Among others, United Airlines Holdings Inc. (NASDAQ: UAL) this week reported strong earnings and revenue growth for the most recent quarter, spurring a stock rally. The momentum is expected to continue as the demand for travel keeps growing after two tough years, despite recession fears. The other tailwinds are the steady pickup in business travel — though it is yet to return to the pre-pandemic levels – and the hybrid work culture that allows people to take trips without waiting for holidays and weekends.
Shares of American Airlines traded higher on Friday afternoon, continuing the post-earnings uptrend. Analysts’ consensus target price signals modest gains in the coming months.
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